Commentary: Start building a defensive portfolio today

It will take “at least a decade from the beginning of the crisis for the world economy to get back to decent shape,” Blanchard said in a recent interview in Europe, according to a Reuters report.

“It’s not yet a lost decade,” Blanchard said, “but it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape.”

No matter what, you can forget about a 2013 quick fix for America’s fiscal-cliff disaster. Won’t happen.

Slow growth will dominate most of the rest of this decade.

That pounding hangover will still be with us during the 2016 elections, echoing GMO’s Jeremy Grantham’s “Seven Lean Years” forecast “that it is unrealistic to expect to overcome the several problems facing most developed countries, including the U.S., in fewer than several years.”

The IMF economist surveys developed and developing nations, our fiscal cliffs plus world problems across the euro zone, China, Japan and more and it adds up to a slow global economic recovery. But while many nations are already working on debt-crisis resolutions, critics fear extreme austerity policies at this time could deepen problems.

As Blanchard put it, again according to Reuters, debt reductions are “unavoidable, but it should be done without stifling growth, walking on a narrow middle path.”

“If you do it too slow, the market thinks you’re not serious, if you do it too fast, you kill the economy. For each country you have to find the right path of consolidation,” said the IMF’s chief economist. “You can have an economy in which inflation is stable and low, but ... the financial system accumulates risks.”

13 best bets for investing in a bear market world: 2013-2018

A question you hear often is: What would economist Gary Shilling and his partner Fred T. Rossi recommend? Why? Because they are straight-shooting, unbiased, research-oriented contrarians who aren’t caught up in the news-of-the-day hoopla. Shilling’s Insight newsletters are essential reading. He’s been a respected Forbes columnist for a few decades. He focuses on the long-term macro issues.

And, like Blanchard, he has been warning us that “much of the excesses and financial leverage built up in past decades, especially in the financial sector globally and among U.S consumers, remain to be worked off.”

Why? The Fed and Treasury’s failed “attempts to bail out the nearly collapsing U.S. private sector” just made matters worse by focusing on bank bailouts rather than jobs. What’s ahead? “Slow global growth in future years.” Not just a temporary, bear-recession dip. But a “deeper depression-style slow-growth likely till the election of 2020.”

Shilling sees beyond today’s lingering hangover of the 2008 banking meltdown, the election wake-up call to corporate CEOs and conservative politicians still demanding deep austerity cuts to solve the debt crisis, and the looming fiscal cliff. Looking years ahead, he warns of ongoing troubles through 2020 as the recovery inches slowly ahead.

He holds steady with his investment recommendations and says the “election does not change our outlook or the ongoing deleveraging taking place.”

So if you a rational investor planning ahead to 2013 and beyond, consider these recommendations. First, six favorable “buy” targets. Then Shilling/Rossi’s seven unfavorable “sell or short” investment themes:

1. North American energy boom

Shilling says Americans “like conventional energy investments including natural gas, on- and offshore drilling and Canadian oil sands ... natural-gas prices appear to have bottomed ... pipelines are attractive ... new nuclear facilities may be postponed in the wake of the earthquake and tsunami in Japan ... renewable energy is problematic since it depends heavily on unpredictable government subsidies. ... Ethanol suffers from drought-sired corn price leaps.”

The idea of a domestic energy boom was reinforced recently when the International Energy Agency published its annual World Energy Outlook: New fracking technologies mean “oil output is poised to surpass Saudi Arabia’s in the next decade, making the world’s biggest fuel consumer almost self-reliant and putting it on track to become a net exporter.” Environmentalists and municipalities impacted by fracking will likely test this macroeconomic forecast.

2. Income-producing securities

“Many investors favor income over problematic capital gains,” including “utilities, drugs and telecoms with high, safe and rising dividends.” Nevertheless, all stocks are vulnerable to a bear market. He also likes investment-grade corporate and municipal bonds.

3. Treasury bonds

Shilling sees Treasurys “as a safe haven in a sea of trouble and in response to slowing economic growth and looming global recession. The likelihood that inflation fears will turn soon to deflation worries also helped. The yield on 30-year Treasurys actually reached our 2.5% target, the 2008 post-Lehman low, in early June. A 2.0% yield is possible as economic and financial conditions deteriorate.”

4. The dollar vs. the euro and Australian dollar

He also see the dollar Index as “the world’s safe haven,” because the euro-zone crisis lingers and its recession deepens. And with Australia now “a captive mineral supplier to faltering China,” its dollar is in focus.

5. Rental apartments

Yes, they’re looking great for folks who either can’t afford to buy a home or are “discouraged by falling house prices.” Stock prices may be high but there are opportunities in direct ownership.

6. Medical office buildings

Opportunities here as postwar babies age, Obamacare kicks in, physicians leave private practice to work for hospitals, all of which will “promote robust, steady growth” here, although “government regulations can be disruptive.”

Here are the seven investment sectors to consider selling and shorting

1. U.S. major and regional banks

Big banks are having big troubles: “Proprietary trading and other profitable activities and are being busted back to less-lucrative spread lending,” while regional banks suffer from “weak loan demand and bad real estate loans.”

2. Developing-country stocks

3. Developed-country stocks

China’s “hard landing” is having a negative effect on “commodity exporters, a major recession in Europe and a strong dollar” warns Shilling, hurting earnings of U.S. multinationals. America’s recession will also damage profits, along with cost-cutting. Shilling sees an “$80 per share in S&P 500 operating earnings over a coming four-quarter period and a bottom P/E of 10.”

4. Commodities

The great commodities bubble started to deflate in 2011 due to the global recession and looming hard landing in China. Copper is way down and excess inventories are building in China.

5. Junk securities

6. Home builders

During the Money Show a few months ago Shilling told Howard Gold that the global recession was spreading from Europe and China and “has already hit our shores.” As a result, prices will “tumble,” hurting home builders in 2013.

7. Your home, second home or single-family investments

Shilling warns that inventory increases are “likely to push prices down another 20% over the next several years.”

Personal note

The Shilling-Rossi team was hit hard by Hurricane Sandy: Their offices in New Jersey and New York have been closed, “without electric power, heat and telephone service ... as our staff has been tending to hurricane-related damage at their own residences while doing what we can to maintain, where possible, some skeletal operational capability from their own homes.”

Our thoughts go out to all of them, with prayers for a quick and successful recovery. We also encouraged by signs that Gary’s bee farm is surviving through all the challenges in recent years; various diseases, colony collapse disorder and a recent bear attack. God be with all of you all.

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